Talking Numbers

This could keep rates low for a while

Bond yields on U.S. government bonds such as the 10-year Treasury note, are roughly where they were eight months ago. That goes against the increase in rates that many forecasters were predicting. After all, the Federal Reserve was tapering its bond-buying stimulus.

Ira Jersey, senior U.S. interest rate strategist at Credit Suisse, says rates will remain low because of what's going on in Europe.

"In the beginning of the year, we all thought that central banks globally," said Jersey, "would be rather hawkish and that the economy would be strong enough for interest rates to go back up. That has not materialized. In fact, we've had just the opposite effect."

Jersey believes the European Central Bank will stay dovish and keep interest rates low. That, in turn, will keep rates low in the United States.

"The Treasury market is now at the whim of 10-year Bunds which is the German government bond," Jersey said. "That has moved lower because of the easy policy by the European Central Bank. And, I think for the time being, over the next few months anyway, Treasurys will probably move with Bunds."

As it already stands, German 10-year Bunds are trading with a yield that is 124 basis points (1.24 percentage points) below U.S. 10-Year Treasury bonds. That's the widest that spread has been in about eight years. As recently as three years ago, the two bonds were trading with the same yields.

"The expectation is for inflation in the euro area to be very low and bordering on deflation," said Jersey, who sees that situation to remain for some time to come. For that reason, he sees rates in Europe staying down and along with it, U.S. Treasury yields.

Some major players have gotten crushed over the past few months betting against bonds. Jersey says that by his calculations, large investors continue to bet on bond yields going up.

"A lot of people are still very underweight what we call duration," Jersey said. "Bets against the market in the Treasury market have been quite large and are still very large."

Duration is the sensitivity of a bond portfolio to a move in interest rates. According to Jersey's data, real money investors have a negative duration bias of about -1.1. A couple of years ago, that number was about 0.

"That suggests that people own less interest rate exposure than they had two or three years ago," said Jersey. "They are positioned for big moves higher in rates. But, they feel comfortable with that, too. So, it's hard to see what would make them capitulate."

To see the full interview with Ira Jersey on what's next for U.S. interest rates, watch the above video.

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